At first glance, it might appear that Walt Disney (DIS -0.04%) and Charter Communications (CHTR -1.73%) ended their recent standoff the way most cable TV blackouts end -- the two companies agreed on a price each could live with, thus restoring Spectrum Cable subscribers' access to Disney's ESPN, ABC, and The Disney Channel.
This impasse did end differently than prior ones have, however. This time, not every Disney-owned cable channel came back to Spectrum's lineup. Namely, Baby TV, Disney Junior, Disney XD, Freeform, FXM, FXX, Nat Geo Wild, and Nat Geo Mundo will no longer be offered to any Spectrum customers. It's still not the end of the world. These channels are among cable television's lesser watched, and generate fairly little revenue for Disney.
That's not the only noteworthy difference with this particular agreement though. This time, Spectrum's cable customers will also be getting gratis access to the ad-supported version of streaming service Disney+, and some Charter customers will even be provided access to ESPN+. Moreover, when it finally launches, the stand-alone version of sports-focused ESPN will be "made available" to Spectrum's customers. Charter's even going to be selling Disney+, Hulu, and ESPN+ to Charter's non-cable internet customers soon.
These are eye-opening changes, to be sure, suggesting that both companies understand that streaming is bringing about the end of cable TV as we know it. And yet, there are still other hints that bloated cable subscription bundles -- once a sign of the cable industry's strong hold on consumers -- are now falling apart.
Sports is the canary in the coal mine
Chief among these clues is that Disney seemingly wants out of the cable television business. Prior to the Spectrum blackout, Disney CEO Bob Iger confirmed his interest in selling at least part of ESPN. Since then, credible rumors have surfaced that Disney is looking to offload television network ABC, a possibility that Iger didn't exactly deny.
And it's not just Disney pulling cable TV bundles apart. Warner Bros. Discovery's Max (formerly known as HBO Max) streaming service is now getting some programming directly from cable news channel CNN. It will also soon be airing a handful of live sports broadcasts, tiptoeing onto cable's turf. The programming in question will be games normally airing on TBS and TNT truTV, which aren't exactly at the center of the sports broadcasting stage.
It's a step though, as is the availability of Thursday Night Football on Amazon's Prime, as well as the addition of professional and college football games to Comcast's streaming service, Peacock. Meanwhile, the buzz is that other cable companies are already asking Disney for deals similar to the one Charter just got.
Cable has been on the defensive for years. A recent Yahoo! Finance poll found that access to live sports programming was the top reason subscribers have continued to pay for cable TV. With sports now increasingly available without it, the end of cable television as we know it is near. The question is, can Disney handle it?
Probably not.
Cable TV is still a cash cow for Disney
Don't misread the message. Disney's not going under anytime soon. On the other hand, it appears unlikely that Disney's streaming business will be able to fully replace its shrinking linear (cable) television business's top and bottom lines.
The graphic below puts things in visual perspective -- at least, partially. In terms of revenue, cable television is Disney's single-biggest business. It's closely followed by the theme parks and resorts division, though, as well as its growing streaming business. These three arms account for similar portions of about 80% of the company's top line.
Data source: Disney. Chart by author. All figures are in millions.
Even so, two things stand out in the chart above. First, Disney's cable television business hasn't produced any top-line growth in years. You could chalk some of that weakness up to the pandemic. Not all of it, though. The advertising market has been healthy of late -- just not for TV.
This may be one of the reasons Disney was so willing to accommodate Charter's demands -- Spectrum Cable looked ready to simply drop all of Disney's content altogether. That would have instantaneously reduced Disney's total carriage fee base by 14.7 million viewers, which Disney's cable arm just can't risk right now.
And the second curious nuance of the chart above? While streaming is now one of Disney's biggest businesses, its growth is clearly slowing down. That's arguably why Disney was willing to allow Charter to sell Disney+, Hulu, and ESPN+ to Charter's non-cable broadband customers. It remains to be seen how many of these customers will want any of those services now if they don't already have them.
Perhaps the more troubling graphic, though, is the one below, which compares the operating incomes of all of Disney's key operating divisions. Unsurprisingly, theme parks and cable television are by far the media giant's two biggest profit centers. Streaming, however, is still losing tons of money despite generating tons of revenue.
For perspective, Disney's parks and resorts arm banked nearly $2 billion worth of operating income last quarter, while its cable business earned $1.9 billion. Streaming reduced the company's bottom line by around $500 million. Never even mind the fact that its cable television earnings are slowly dwindling, in step with continued cord-cutting.
Data source: Disney. Chart by author. All figures are in millions.
And there's the rub. Assuming most or all of its cable television business will eventually go away now that the cable bundle is disintegrating, Disney has a massive amount of revenue and income ground to make up with streaming. It's not likely to fully close those gaps, particularly if it expects hordes of cord-cutters to flock to a stand-alone version of ESPN.
While sports may be the most common reason consumers continue paying for cable, a survey performed by CableTV.com indicates that only 19.5% of cable customers cite sports as the top reason they're still paying sky-high cable prices. That's not many. The rest of these consumers say there are other reasons they stick with it, many of which (like access to local news or a DVR device) are slowly but surely fading away.
Meanwhile, although ESPN is clearly the leading sports channel, it still only offers a minority of all sports programming. Networks like Fox, NBC, and CBS are collectively carrying more sports, offering much of it for free outside of conventional cable platforms, including via old-school aerial antennas.
Demand answers
There's nothing that investors must "do" immediately. Disney's deal with Charter bought both companies some time by sweetening the value of Spectrum's cable packages. Presumably, both companies will use that time.
Nevertheless, long-term doubts remain. Debundling cable plans works against Disney since neither consumers nor cable companies want to pay for what they're not watching or selling, respectively. (It's a reasonably safe bet that many ESPN watchers don't care about access to The Disney Channel, and vice versa.) Now they won't have to, undermining leverage that Disney previously utilized a lot.
That's arguably why Disney's so willing to walk away from its cable -- and broadcast -- business and double down on streaming. The problem is that streaming doesn't appear capable of fully offsetting the fiscal deterioration of Disney's cable TV business. The streaming arena's a heck of a lot more competitive than cable ever was.
Maybe Iger's got plausible solutions to these concerns. Until he articulates them though, Disney's going to be a tough stock to own. There's too much at stake with this slow-moving but inevitable shift.
